The FDIC guarantees bank deposits of up to $250,000 — a figure most of us weren't thinking all that much about until a week ago, when regulators guaranteed all customer deposits, even those above a quarter-million dollars, at two failed banks.
Why it matters: Now lawmakers, academics, and some in the financial industry are debating whether the FDIC limit, which hasn't been raised since 2008, needs to be increased — or abolished altogether.
- Over the weekend, four different lawmakers involved in banking said they'd consider raising the limit, CNBC reports. Last week, Maxine Waters (D-Calif.), ranking member of the House Financial Services Committee, told the New York Times that raising the limit is something Congress should contemplate, in an interview.
- A coalition of midsize banks is asking the FDIC to insure all deposits for at least two years, Bloomberg reported.
The big picture: Regulators stirred up some murkiness when they decided to protect all depositors at Silicon Valley Bank and Signature Bank, with the aim of stemming a serious systemic risk to the financial system.
- On the one hand, their actions sent the message that if you deposit more than $250,000 at an important-enough bank, it's safe.
- On the other hand, no one has said exactly that. The limit still exists and uninsured deposits are still uninsured.
- And it's unclear what makes a bank important enough: First Republic Bank, SVB's similarly sized peer, continued to experience withdrawals of uninsured deposits after SVB's rescue.
So we're left with confusion. "At this point, the $250,000 cap is illusory," write Lev Menand and Morgan Ricks in a piece for the Washington Post. But the fact that the official cap remains in place means that “much of the nation’s money is unsound and unstable — an ever-present sword of Damocles hanging over the U.S. economy."
- Menand and Ricks argue the U.S. should scrap the limit.
Zoom out: The rationale behind the deposit limit is that everyday Americans are low-information lenders — we put our money into a bank, unsecured, without doing a deep dive into the bank's finances to make sure it's sound. Knowing that deposits are backed by the FDIC obviates the need for every person to become a bank analyst.
- But wealthier depositors, including the companies that place more than a quarter-million dollars in the bank, are supposed to be more sophisticated — and better able to handle the risk.
- What happened with Silicon Valley Bank throws that whole line of reasoning out the window.
- "Large depositors are both bad at monitoring banks and perfectly capable of engaging in destabilizing runs," per Menand and Ricks.
Why should all Americans care about the fate of wealthy depositors? Because their bank runs affect us, too. As we've seen this month, payrolls become imperiled and other banks start to teeter.
The other side: Opponents have long argued that insuring all deposits would give banks too much license to take risky bets with depositor money.
The bottom line: In stable times, deposit insurance is part of the financial wallpaper. But when the, er, bank hits the fan, everyone starts paying attention.
